Impact of countercyclical fiscal policy on total factor productivity in state-owned enterprises: A corporate governance perspective

The impact of the countercyclical fiscal policy (CFP) on short-term economic recovery has been extensively studied. Yet, little is known about how it affects total factor productivity (TFP), a determinant of long-term growth. Utilizing unique data on government-approved projects in China and a semi-parametric difference-in-differences approach, we observe an l-shaped negative impact of CFP on TFP in state-owned enterprises (SOEs), particularly local ones. The decline in TFP growth was manifested in slower technological progress and increased resource misallocation, especially in dynamic rather than static allocation. The social burdens placed on SOEs, evident in employment missions and high leverage ratios, drive mission-oriented behaviors during the implementation of CFP, resulting in a decline in TFP growth. Additionally, the principal-agent problems within SOEs, reflected by agency costs and exacerbated by institutional challenges like limited fiscal transparency and corruption, further intensify the negative impact. These highlight the importance of strengthening corporate governance of SOEs.